Debt Ratios for Residential Lending
Lenders use a ratio called "debt to income" to decide your maximum monthly payment after your other recurring debts have been paid.
How to figure your qualifying ratio
Most underwriting for conventional mortgages requires a qualifying ratio of 28/36. An FHA loan will usually allow for a higher debt load, reflected in a higher (29/41) qualifying ratio.
The first number in a qualifying ratio is the maximum percentage of your gross monthly income that can be spent on housing costs (this includes principal and interest, private mortgage insurance, hazard insurance, property tax, and HOA dues).
The second number is what percent of your gross income every month that can be applied to housing expenses and recurring debt. For purposes of this ratio, debt includes payments on credit cards, auto payments, child support, etcetera.
Examples:
28/36 (Conventional)
- Gross monthly income of $2,700 x .28 = $756 can be applied to housing
- Gross monthly income of $2,700 x .36 = $972 can be applied to recurring debt plus housing expenses
With a 29/41 (FHA) qualifying ratio
- Gross monthly income of $2,700 x .29 = $783 can be applied to housing
- Gross monthly income of $2,700 x .41 = $1,107 can be applied to recurring debt plus housing expenses
If you want to calculate pre-qualification numbers with your own financial data, use this Loan Pre-Qualifying Calculator.
Guidelines Only
Remember these are just guidelines. We will be happy to go over pre-qualification to help you determine how large a mortgage you can afford.
AmeriBest Mortgage can answer questions about these ratios and many others. Give us a call at 3217777277.